A financial analyst breaks down the biggest differences between Home Depot and Lowe's - and explains which retailer has the edge

Home DepotErik S. Lesser/AP Images

  • Home Depot and Lowe's are the two biggest players in US home improvement retail.
  • Seth Basham, managing director of equity research at Wedbush Securities, spoke with Business Insider about what differentiates the two companies.
  • He said that in many ways, Home Depot has an edge over its competitor.
  • But he added that Lowe's CEO Marvin Ellison is on a mission to "Home Depot-ize" Lowe's.

Home Depot and Lowe's dominate the home renovation retail sector in the United States.

But both retailers exhibit a number of subtle traits that set them apart from one another. What's more, the performance of these retail competitors has diverged somewhat.

Home Depot appears to be doing relatively well, easily besting its rival in terms of market share. Meanwhile, Lowe's has undergone a series of hiccups, shutting down stores in the US, Canada, and Mexico, receiving a downgrade from Moody's, and losing traffic during the first nine months of 2018.

Business Insider recently spoke to Seth Basham, the managing director of equity research at Wedbush Securities, to get a better idea of the differences between Home Depot and Lowe's.

He said that, while Home Depot currently has the upper hand, no one should give up on Lowe's - or its new CEO Marvin Ellison.

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Home Depot can point to higher average sales numbers in its stores.

Home Depot can point to higher average sales numbers in its stores.

According to Basham, Home Depot rakes in more money than Lowe's through store sales on average. He added that the company also boasts better operational efficiency, whereas Lowe's runs the risk of "producing costs tremendously" thanks to its reduced operational efficiency.

Compared to its rival, Lowe's is a bit like the new kid on the block.

Compared to its rival, Lowe's is a bit like the new kid on the block.

Basham explained that Lowe's sales and operational disadvantage is partly "a function of how the company grew up."

Technically, Lowe's was founded in 1946, while Home Depot was established in 1978. But the newer store embarked on its expansion first.

"Lowe's' growth streak in terms of opening new stores happened after Home Depot's," Basham said.

Basically, because Home Depot expanded its store presence before Lowe's, it got the first pick when it came to store locations. Basham described Lowe's as occupying many "secondary real estate locations" that aren't ideal in terms of population flow or traffic patterns.

"There's a bit of a structural deficiency in terms of their store locations," he said.

Home Depot gets a greater share of its sales from professionals.

Home Depot gets a greater share of its sales from professionals.

Another factor that accounts for Home Depot's sales advantage is its comparative popularity with home improvement professionals. In the home construction and renovation space, customers can generally be divided into two groups: professionals who work in the field, and do-it-yourself shoppers tackling projects on their own.

Basham said that professional contracts account for 35% of sales at Lowe's, while Home Depot accrues 40% of its sales from professional contracts.

So why do the pros tend to go to Home Depot? Basham said that part of the reason is that professionals are often more brand-conscious.

"They want to use products they know they can trust, and Home Depot has better brands," he said.

Other factors include Home Depot's superior stocking system and customer service processes, which include everything from giving pros access to "knowledgeable employees," helping them find products, and staging items for pick-up. According to Basham, Home Depot generally provides an "easy in, easy out" experience for pros.

And, while list pricing is the same across both companies, bulk pricing is slightly more competitive at Home Depot, according to Basham.

But don't count Lowe's out just yet. Basham said that Lowe's is "very focused" on boosting its pro business. He gave the example of the company's 2017 acquisition of Maintenance Supply HQ. Basham likened the move to Home Depot's 2015 acquisition of Interline Brands, which helped the home improvement retailer cross-sell to customers who previously flocked to Interline.

"It's strategic," Basham said. "Home Depot's had success since it acquired Interline in getting that cross sale to work. I think there's still room for that to work for Lowe's."

Lowe's has yet to see much international success.

Lowe's has yet to see much international success.

Lowe's has recently had a few international stumbles. It's closed stores in Canada and Mexico recently. In 2016, the retailer also gave up on a joint-venture operation in Australia. Basham blamed the struggles on the fact that Home Depot has already had success in some of those international markets, as well as the infrastructure costs that it takes to run stores in different countries.

"Lowe's has never had success internationally," he said. "They haven't figured out the formula to get there."

Home Depot, on the other hand, has triumphed abroad, according to Basham.

"They have very profitable businesses in Canada and in Mexico," Basham said. "The comparable store sales growth in those countries has been nearly as good as the US for a number of years."

But that wasn't always the case. Basham said that in the late 1990s, Home Depot made an unsuccessful foray into Argentina, Brazil, Chile, and China. So there's still hope for Lowe's to turn things around.

Home Depot crushes Lowe's when it comes to online innovation.

Home Depot crushes Lowe's when it comes to online innovation.

Basham called online fulfillment "an important area for both companies." And, according to him, Home Depot is the clear winner in this category. He explained that Home Depot "has taken it to the next level" by offering customers services like same-day-delivery.

"They're investing heavily in building up the infrastructure necessary to offer those types of delivery services," he said. "Lowe's hasn't really gone down that path yet."

When it comes to other issues pertaining to the online sphere, Basham said that Home Depot has a stronger IT infrastructure, better online marketing, and an easy-to-navigate website.

"Case in point is that Lowe's website went down on Black Friday," he said.

But don't count Lowe's out.

But don't count Lowe's out.

Lowe's may be an underdog compared to Home Depot, but Basham said that he's still relatively optimistic about both companies. He called Ellison, who officially took the helm at Lowe's in July, a "straight shooter" and praised his leadership of the company.

Before serving as CEO of JCPenney, Ellison held several executive roles at Home Depot.

"He's trying to essentially Home Depot-ize Lowe's," Basham said. "He's divesting non-core businesses, and focusing on the US business and the core stores."

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